Europe Bets the Farm

In the end, it wasn't much of a contest. Last week, European Central Bank
chief Jean-ClaudeTrichet was bluffing like Cool Hand Luke, saying his colleagues
hadn't even discussed the so-called "nuclear option" of buying sovereign debt,
amid an intensifying financial panic.

A couple of sweaty days later, Trichet and friends had come around and
pressed the biggest red button they could scare up in the form of a $1-trillion
debt bailout.

The markets were initially impressed, but became a bit less so as the week
wore on. When politicians hastily gather to arrange a ransom that might let
their economies off the hook "before the markets open on Monday," even a
trillion dollars can seem more desperate than decisive.

Traders may start wondering what else might be on offer a few Sundays down
the road, if things don't turn around. Voters may profess to hate bailouts, but
everyone knows that they like hard times even less. Ask Gordon Brown, or the former rulers of Rhine-Westphalia.

European banks holding the bad debts temporarily propped up by the bailout
will remain tempting targets. They'll be in the firing line because of Europe's
shortsighted insistence that no country should default, no matter how crushing
its debt burden. Debt repayment instead of growth works for the lenders only up
to the point at which the borrowers-or their kids-revolt and refuse to pay, and
the can kicked down the road explodes anyway.

It's true that the US crisis blueprint Europe is following has to this point
been a huge success, saving the financial system, reviving previously frozen
markets and, most crucially, kick-starting economic growth, all at minimal cost
to the taxpayers. But unlike their US counterparts, European banks have not been
granted an interest-rate curve so steep as to be virtually idiot-proof, the fat
spreads leaving no banker behind. Nor were they forced to raise as much capital
while the getting was good.

On the other hand, Europe is hardly the basket case pessimists like to weave.
As argued in this space two weeks ago, it's rich, resourceful
and, for the moment at least, reform-minded. The most recent economic data
unearthed little growth, to be sure, but did show plenty of resilience.

Latin America and Asia have overcome their own debt blowups, and there's no
reason to think that, in the long run, Europe will be any different. By
definition, there's no obvious way out of a crisis. And yet crises come and
crises go.

The Chinese know this as well as anyone, though it remains to be seen whether
they'll see an opportunity waiting to be seized. While Europe has drawn most of
the attention, Shanghai stocks are down on the year almost as much as those in Athens, on worries the Chinese
economy will overheat.

Inflation, housing prices, and bank lending all rose in April above expectations,
suggesting more monetary tightening is in the cards. But no amount of monetary
tightening will reverse the long-term leveling trend in the distribution of
global wealth, which Lawrence Roulston notes is manifesting itself in an Asian
shopping spree for cars and diamonds.

If burgeoning auto ownership pumps up oil prices, one beneficiary would be a
small Canadian provider of specialized services to the oil sands extractors, Irwin Michael writes. But perhaps more even than cars and
diamonds, growing affluence means increased demand for clean water, and a French
water treatment giant is poised to capitalize on the scarcity of that resource,
according to Carla Pasternak.

In general, Europe has no shortage of well-run multinationals heavily
involved in emerging markets for lack of similar growth opportunities at home.
They're out of favor right now-and quite affordable.